Monday, September 22, 2003
International Perspective will be on vacation next week.
The next weekly letter will be available on October 6.
Looking Ahead covers the scheduled events for the next two weeks.
IMF becomes more optimistic
The International Monetary Fund released its semi-annual World Economic Outlook on Thursday, ahead of its annual meetings in Dubai, United Arab Emirates. In it, they said that the world's economy is showing signs of picking up but the pace and strength of the recovery is still unclear. The IMF maintained its world growth outlook of 3.2 percent for 2003 and a more robust expansion of 4.1 percent next year. The IMF said that a swift end to the Iraqi war, more bullish equity markets accompanied by improved business confidence and lower interest rates in the United States and Europe have all contributed to a better outlook. The fund said among rich nations, the United States would lead a global recovery despite weak labor markets and considerable excess capacity.
High on the IMF's list of concerns was current account imbalances and the world's dependence on the United States, which it said made the case for structural reforms more urgent. Despite the depreciation of the U.S. dollar, the U.S. current account deficit is projected at 5.1 percent of gross domestic product in 2003 and 4.7 percent in 2004. This suggests that the U.S. dollar will need to weaken further, and the IMF warned that policymakers should be ready to manage the effects of further dollar depreciation. Thus far, the brunt of the adjustment has been borne by the euro, the Canadian dollar and currencies of smaller industrial countries.
The topic is expected to come up Saturday (September 20th) at a Group of Seven meeting in Dubai and at the annual gathering of the IMF, where Asian countries are in attendance. Europe and the United States are expected to pressure countries like China to help carry the burden of global trade imbalances by loosening their currency regimes.
In an upward revision to forecasts, the fund predicted the U.S. economy would expand 2.6 percent this year and 3.9 percent next, up from April's forecasts of 2.2 percent and 3.6 percent. The IMF cut its GDP forecast for Europe in half to just 0.5 percent and only 1.9 percent in 2004. Growth there is being reined in by the strength of the single currency and weakness in Germany. The Fund opined that the European Central Bank may need to cut interest rates again. Projections for Japan were increased sharply, but the IMF warned that it was still vulnerable and bold steps were needed to speed up corporate and banking restructuring and to end deflation. Japan's economy is now seen advancing 2.0 percent this year and 1.4 percent next year.
A correction in the U.S. current account and an accompanying disorderly fall in the dollar's value is another major risk to the outlook according to the IMF. Despite its depreciation over the last year, the dollar still appears overvalued from a medium-term perspective, and the risk that its adjustment may overshoot cannot be ruled out. The IMF noted that the make-up of the current account deficit, which used to be financed by equity flows, had shifted and is now funded primarily by sales of government agency and corporate paper, including to a number of Asian central banks. The ballooning fiscal deficit is also a cause for worry, the IMF said, calling the Bush Administration's budget forecasts "optimistic".
Some thoughts on the Swedish vote
One cannot help but be struck by the contrast of Sweden's vote not to join the EMU with those of the 10 eager eastern European countries that breathlessly await EU - and eventual EMU membership. On the same day that Swedes voted against the euro by a sizable margin, 67 percent of Estonians voted in favor of joining the European Union. Of the ten countries that are due to join in May 2004, only the Latvians have yet to vote. The other nine have already approved membership in the EU. These new members will not need to vote on the euro, as adoption is automatic once certain economic tests are met. The failure of Sweden's establishment to persuade voters of the euro's benefits is a reminder that it is not easy to argue the case based on economics alone without consideration of current social programs. That may prompt some EU entry candidates to push government spending cuts, which are required for euro entry, to the backburner.
So far September is positive for equities
September is a notoriously rocky month for equities, but September 2003 is shaping up as an exception. All of the equity indexes followed here are higher again in the third quarter after reaching their nadir at the end of the first quarter. (Japan was the exception, as the Nikkei and Topix waited until the end of April before doing a U-turn.) Even though most indexes were down Friday, all were up with the exception of the typhoon-ravaged Kospi.
World outlook improves at last
